Lehman's liquidity problem was hidden

March 13, 2010|By Nathaniel Popper | Los Angeles Times

NEW YORK — In the months before Lehman Bros. collapsed in late 2008, setting off the global financial crisis, the investment bank used an accounting trick to make it appear to have greater liquidity than it did, a court-appointed examiner alleges in a report unsealed Thursday.

A number of top Lehman executives, including former Chief Executive Richard Fuld, knew of the alleged manipulation and could be held liable for it, according to the report by Anton Valukas, who was appointed by the federal judge overseeing Lehman's bankruptcy to investigate the causes of the firm's demise.

The 2,200-page report also states there are plausible legal claims stemming from Lehman's failure that could be brought against JPMorgan Chase & Co. and accounting firm Ernst & Young.

The examiner says Lehman's auditors at Ernst & Young "were aware of but did not question Lehman's use" of the alleged accounting manipulation.

Patricia Hynes, a lawyer for Fuld, issued a statement: "Mr. Fuld did not know what those transactions were. He didn't structure or negotiate them, nor was he aware of their accounting treatment."

Ernst & Young issued a statement late Thursday saying the financial reports it prepared for Lehman "were fairly presented."

A JPMorgan spokeswoman declined to comment.

The report also blames top Lehman executives for entering businesses and not exiting when problems became clear. Such behavior was encouraged by a compensation regime that rewarded short-term gains while ignoring long-term risks, the report states.

The company's fate was sealed, Valukas' report says, by "Lehman executives, whose conduct ranged from serious but non-culpable errors of business judgment to actionable balance-sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by government agencies, who by their own admission might better have anticipated or mitigated the outcome."